Basics of Personal Financial
Planning
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Introduction
About the PFP Section & PFS Credential
• The AICPA PFP Section provides information,
resources, advocacy and guidance for CPAs who
specialize in providing estate, tax, retirement, risk
management and investment planning advice to
individuals and their closely held entities
• The CPA/Personal Financial Specialist (PFS)
credential distinguishes CPAs as subject-matter
experts who have demonstrated their financial
planning knowledge through experience, education
and testing
Personal Financial Planning Section
2
Today’s Objectives
You gain an enhanced understanding of the basics of financial
planning and how a company’s compensation and benefits
programs add to your financial well-being
You gain an enhanced understanding of basic investing
concepts and how to develop your investment plan
You gain an enhanced understanding of how a Company’s
compensation and benefits programs can contribute to the
success of your investing
You identify and commit to taking the actions you can to
significantly enhance your financial well-being
Personal Financial Planning Section
3
Life Events: Will You Be Ready?
• Premature Death
• Retirement
• Serious Illness
• Death of Spouse
• Aged Parents
• Children Getting Married
• Second Home
• Remarriage
• Starting a Business
• Divorce
• Paying for College
• Job Loss
• Relocation
• Home Purchase
• Birth of Children
• Marriage
• Temporary Disability
Personal Financial Planning Section
4
Life’s Financial Trade-Offs
CURRENT NECESSITIES
FUTURE NECESSITIES
Basic shelter, food
Basic shelter, food
clothing, transportation
clothing, cash for emergencies
and medical care
and nursing home care
Trade-offs
CURRENT EXTRAS
FUTURE EXTRAS
New kitchen, new car,
Larger home, private
vacation, family gifts
college, retirement travel,
bequests/charity
Personal Financial Planning Section
5
The Value of a Financial Plan
A financial plan will help you to clarify:
Your financial goals
Strategies to achieve the goals
Specific steps to implement the strategies
Personal Financial Planning Section
6
Areas to Explore
Saving
Managing debt
Insurance
Investing
Education funding
Personal Financial Planning Section
Retirement funding
Pre-retirement planning
Incapacitation planning
Estate planning
Company stock ownership
7
The Financial Planning Process
What do you want?
What will you have?
Will you have a shortfall?
What strategy will you employ?
What actions will you take?
Personal Financial Planning Section
8
What Do You Want?
These are your financial planning goals
Each goal will have its own horizon
• For the period of accumulation
• For the period over which it will be spent
Make a list and refine as you go along
Start with broad ideas and work toward increasingly
specific and measurable goals
Personal Financial Planning Section
9
What Will You Have?
What you have now
What you will save from future income
Future investment earnings on the above if invested
Expected future benefits
Personal Financial Planning Section
10
Managing Debt
What Managing Debt Means
Conquering excessive debt
Using debt wisely:
•
•
•
•
•
Credit cards
401(k) plan loans
Home mortgages
Home equity loans
Automobile debt
Maintaining a good credit history
Personal Financial Planning Section
12
Debt Ratios
Housing expense ratio
• Housing expenses (mortgage, taxes and insurance) should not
exceed 28% of gross pay
• Gross pay is before taxes and deductions
Debt to income ratio
• Total consumer debt (not including mortgage) should be less
than 20% of take-home-pay
• Take-home pay is after taxes and deductions
Personal Financial Planning Section
13
Warning Signs of Too Much Debt
Unable to save 10% or more of gross income
Habitually pay only the minimum monthly payments
on your credit cards
Borrowed from one lender to pay another
Asked a friend or relative to co-sign a loan because
credit record is weak
Unable to figure out how much you owe
Would be in immediate financial trouble if you lost
your job tomorrow
Personal Financial Planning Section
14
Conquering Debt
Stop borrowing
Start using a debit card
Prioritize your debt repayment
Seek lower rates
Determine the maximum you can pay
Repay highest cost debt first
Continue paying the maximum
Personal Financial Planning Section
15
Decrease Debt or Invest?
Pay down debt when you can’t invest at a higher rate
401(k)
Interest Paid /
Received
Match*
Credit
Card
Investment
Mortgage
100.0%
18.0%
8.0%
6.5%
--
0.0%
-2.0%
-1.6%
100.0%
18.0%
6.0%
4.9%
Tax effect @ 25%
Net Paid / Received
* 100% of first 3% of your pre-tax regular contributions for ABC Company.
Personal Financial Planning Section
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Using Home Mortgages Wisely
Determining whether buying is appropriate
Choosing the right type of mortgage
Deciding if you should refinance
Knowing whether to pay points
Deciding whether to prepay mortgage principal
Personal Financial Planning Section
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Is Buying a Home Right for You?
Buying
Renting
Change location frequently
No
Yes
Maintenance responsibilities
Yes
No
Ability to customize
Yes
Perhaps
Payment increases
Perhaps
Likely
Investment element
Yes
No
Tax benefits
Yes
No
Initial costs
Yes
Yes
Personal Financial Planning Section
18
Tax Benefits of Home Ownership
Mortgage interest
Property taxes
Other itemized deductions
Total itemized deductions
Less: standard deduction you would have
received had you not owned a home
Extra amount you can deduct
Times: your tax rate
Your tax savings
Personal Financial Planning Section
$6,000
2,000
4,250
12,250
-4,750
7,500
25%
$1,875
19
Types of Mortgages
10.0%
9.0%
Rate
8.0%
7.0%
Fixed Rate
6.0%
Adjustable Rate
5.0%
4.0%
3.0%
1
5
9
13
17
21
25
29
Year
Personal Financial Planning Section
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Consider a Fixed Rate Mortgage When:
You intend to live in your home for a significant
period of time, or
You anticipate rising interest rates in the future
Personal Financial Planning Section
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Consider an ARM When:
Fixed rate is at least 2% points greater than
adjustable rate
You expect your income will increase enough to
cover any potential payment increases
You expect to move before the rate increases
(beware of prepayment penalties)
Personal Financial Planning Section
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Prepaying Mortgage Principal
400
$170,257
360
350
300
250
210
$89,279
200
Standard
Payment
Standard
Payment
Additional
$150
Per
Additional
$150
Per
Month
Month
150
100
50
360
210
$0
$0
0
NumberofofPayments
Payments
Number
Total
TotalInterest
InterestPaid
Paid
Assumes a 30 year fixed-rate mortgage of $100,000 at 8.25%
Personal Financial Planning Section
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Consider Prepaying Principal When:
You use the standard deduction
You invest conservatively
Personal Financial Planning Section
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Maintaining a Good Credit History
Establish a good credit history
Obtain your credit report
Understand your credit report
Correct mistakes in your credit report
Personal Financial Planning Section
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Saving & Investing
Importance of Saving and Investing
If you don’t have the following
• Sufficient assets fully devoted to your goal(s)
• Expected future benefits from third parties
• Expected future borrowing
Then you will need the following to reach your
goal(s)
• Future savings devoted to your goals
• Future earnings from investing the above if you invest those
assets
Personal Financial Planning Section
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Key Saving and Investing Concepts
Saving versus investing
Combining saving and investing
Saving and investing early
Tax-deferred saving and investing
Tax-deductible saving and investing
Saving and investing using employer
contributions
Personal Financial Planning Section
28
Saving Versus Investing
Saving
Investing
Means
Not spending
money
Doing
something with
money to earn a
return
Needs to
be done
In a regular,
disciplined
manner
Carefully and
with due
consideration
Personal Financial Planning Section
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Combining Saving and Investing
Stan
Saves $2,000 per year
Starts at age 25
Saves in a non-interest
bearing account
Personal Financial Planning Section
Vickie
Saves $2,000 per year
Starts at age 25
Invests and earns an
8.9% pretax and 6.68%
after-tax return
30
Combining Saving and Investing
Save Only
Save and Invest
$400,000
$367,307
$350,000
Stan
$300,000
Vickie
$250,000
$200,000
$120,748
$150,000
$80,000
$100,000
$50,000
$30,000
$49,018
$50,000
$0
In 15 Yrs
Personal Financial Planning Section
In 25 Yrs
In 40 Yrs
31
Saving and Investing Early
Stan
Saves $2,000 per year
Starts at age 35
Continues for 30 years
Invests and earns an
8.9% pre-tax and 6.68%
after-tax return
Personal Financial Planning Section
Vickie
Saves $2,000 per year
Starts at age 25
Stops after 10 years
Invests and earns an
8.9% pre-tax and 6.68%
after-tax return
32
Saving and Investing Early
Save Later for 30 Years
Save Early for 10 Years
$198,000
Vickie
$188,000
$178,227
$178,000
189,080
Stan
$168,000
At 65
Personal Financial Planning Section
At 65
33
Tax-Deferred Earnings
Stan
Saves $2,000 per year
Starts at age 25
Continues for 40 years
Invests in a taxable
account and earns an
8.9% pre-tax and 6.68%
after-tax return
Personal Financial Planning Section
Vickie
Saves $2,000 per year
Starts at age 25
Continues for 40 years
Invests in a Tax-Deferred
account and earns an
8.9% pre-tax return
34
Tax-Deferred Earnings
Taxable Account
Tax-Deferred Account
$600,000
$493,435
$500,000
$400,000
$367,307
Stan
Vickie
$300,000
$200,000
$100,000
$0
At Age 65
Personal Financial Planning Section
At Age 65
35
The Saving Process
What do you want?
What will you have?
Will you have a shortfall?
What strategy will you employ?
What actions will you take?
Personal Financial Planning Section
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What Do You Want?
Identify your specific savings goals
Identify your time horizon
Quantify your saving goals
Prioritize your saving goals
Personal Financial Planning Section
37
Identify Your Specific Saving Goals
Pay down existing debt
Create an emergency fund
Save for retirement
Accumulate a down payment for a house
Build a college fund for your children’s education
Set aside money for a specific goal (vacation, fun
and games, etc.)
Personal Financial Planning Section
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Create an Emergency Fund
Set aside 2 to 4 months of living expenses
Use it for a crisis (i.e., roof leaks)
Use it and replace it
Don’t use it for discretionary spending (i.e.,
vacation)
Personal Financial Planning Section
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Save for Retirement
Do everything possible NOW
Start early—you’ll end up with more
Personal Financial Planning Section
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Identify Your Time Horizon
Identify number of months or years until goal
Allow as much time as possible:
• You can accept a lower investment risk
• Your monthly saving and investing commitment will be less
Personal Financial Planning Section
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Examine Your Spending Habits
Keep a list of all spending for one month
Compare total spending to take-home pay
Examine closely if you have a substantial
unexplained gap
Become highly knowledgeable about your expenses
Personal Financial Planning Section
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Identify Ways to Save More
Save your next raise
Save your next bonus
Reinvest dividends and
interest
Save all cash gifts
Rent instead of buying
(books, videos, etc.)
Personal Financial Planning Section
Delay buying a new car upon
paying off present car loan
Save the “donut money”—
and lose weight!
Buy generic products
Trim your spending by 5%
Be creative
43
What About Investing?
Combined with savings, a key resource for
achieving your financial goals
Investing skills are needed to prudently utilize
• Company 401(k) investments
• IRAs investments
• Savings invested outside these plans
All investments involve risks
Approach investing carefully
Personal Financial Planning Section
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What Investing Carefully Means
Phase I: Learn investing basics
Phase II: Develop your investment plan
Phase III: Implement your investment plan
Personal Financial Planning Section
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Investing Basics and
Planning
Why Learn Basic Investing Concepts?
ALL investments involve risks
• Even so-called risk-free investments like a cash
As such, approach investing carefully
Learning basic investing concepts is part of
investing carefully
Personal Financial Planning Section
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What Are The Major Asset Classes?
Major Asset
Class
Cash
Characteristics
Matures in less than
one year
Bonds
Fixed income
Stocks
Varied maturities
Company ownership
Hard assets
Asset ownership
Goals
Capital preservation
Liquidity
Income
Capital preservation
Possible dividend
income
Capital appreciation
Capital appreciation
Historical
Average
Returns*
3-4%
5-7%
10-13%
Varies
Inflation hedge
* Pretax return over 75 years through 2008
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What Risks are Involved in Investing?
Primary long-term
risk
Inflation risk
Loss of purchasing power
Primary short-term
risk
Volatility risk
Instability of investment
Business risk
Inherent risks of a particular
business
Market risk
Likelihood that the market as a
whole will fall
Liquidity risk
Risk of not being able to access
money when needed
Interest rate risk
Loss of principal on fixed-rate
investments due to rising
interest rates
Currency risk
Investment’s value will be
affected by changes in
exchange rates
Other risks
Personal Financial Planning Section
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How are These Risks Managed?
Primary long-term
risk
Inflation risk
Invest in stocks
Primary short-term
risk
Volatility risk
Hold investments for the longterm
Business risk
Diversify within an asset class
Market risk
Diversify among asset classes
Liquidity risk
Diversify among asset classes
Other risks
Have an emergency fund
Interest rate risk
“Ladder” portfolios
Currency risk
Diversify among countries or
hedge
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However, Stocks Have More Volatility Risk
Higher
Return
20%
15%
Annual
Return
Small Company Stocks
Large Company Stocks
10%
5%
Cash
Intermediate-Term
Government Bonds
Lower
Return
Lower
Deviation
Personal Financial Planning Section
Degree of Volatility
Higher
Deviation
51
Manage Volatility Risk by Investing Over
Time
150%
125%
Volatility Risk Over Time
Ranges of Return
100%
One-Year Holding Periods
Five-Year Holding Periods
Twenty-Year Holding Periods
Average Return
75%
50%
25%
12.7%
0%
10.4%
3.7%
5.4%
-25%
-50%
-75%
Small
Company
Stocks
Large
Company
Stocks
Long-Term
Government
Bonds
Cash
Range of compound annual returns over the period 1926-2002. Source: Ibbotson Associates, 2004.
Personal Financial Planning Section
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Managing Business and Market Risks
Portfolio
Risk
Portfolio Risk=
Market Risk + Business
Risk
Business
Risk
Market Risk
Number of
Holdings
3
Personal Financial Planning Section
5
7
9
11
13
15
53
Manage Liquidity Risk by Diversifying
Return
Current
Deferred
Real Estate
Bonds
Money market
funds
Convertible bonds
Certificates
of deposit
Small-company stocks
Large-company stocks
Utility stocks
Lower
Personal Financial Planning Section
Liquidity Risk
Zero coupon bonds
Higher
54
Managing Interest Rate Risk
Price
Interest
Rates
Bonds
Managed by “Laddering” Portfolio of Bonds
Personal Financial Planning Section
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Risk / Return Trade-Offs: Example 1
Degree of Volatility
Higher
Return
20%
15%
Annual
Return
Small Company Stocks
Large Company Stocks
10%
5%
Cash
Intermediate-Term
Government Bonds
Lower
Return
Lower
Deviation
Personal Financial Planning Section
Degree of Volatility
Higher
Deviation
56
Risk / Return Trade-Offs: Example 2
Cash vs. Bonds vs. Stocks
Current yield
Appreciation
Total return
Estimated income taxes @ 30%
After-tax return
Inflation rate
After-tax “real” rate of return
Relative risk
Personal Financial Planning Section
Cash
Bonds
Stocks
3.3%
0.0%
3.3%
(1.0)%
2.3%
(3.1)%
(0.8)%
4.8%
0.0%
4.8%
(1.4)%
3.4%
(3.1)%
0.3%
2.2%
6.5%
8.7%
(2.6)%
6.1%
(3.1)%
3.0%
Low
Medium
High
57
Risk / Return Trade-Offs: Example 3
Sub-Categories Within Major Asset Classes
High Risk/
High Return Potential
Hard Assets
Stocks
Bonds
International
Small Company
Stocks
Large Company Stocks
Long Term
Intermediate Term
Short Term
Low Risk/
Low Return Potential
Cash
Personal Financial Planning Section
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Risk / Return Trade-Offs: Example 4
Taxable vs. Tax-Exempt Investments
Tax-Exempt Returns
Tax-Rate
3.0%
4.0%
5.0%
6.0%
7.0%
Tax-Equivalent Returns
10.0%
3.3%
4.4%
5.6%
6.7%
7.8%
15.0%
3.5%
4.7%
5.9%
7.1%
8.2%
25.0%
4.0%
5.3%
6.7%
8.0%
9.3%
28.0%
4.2%
5.6%
6.9%
8.3%
9.7%
33.0%
4.5%
6.0%
7.5%
9.0%
10.4%
35.0%
4.6%
6.2%
7.7%
9.2%
10.8%
Personal Financial Planning Section
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Risk / Return Trade-Offs
Between Differing Portfolios
Portfolio A
Portfolio B
Portfolio C
Portfolio A
Portfolio B
6.61%
Return
7.06%
Return
Risk 4.25%
6.61%
Return
Risk 4.25%
Risk 3.6%
Return Risk*
6.61%
3.60%
Return Risk*
6.61%
4.25%
Cash
25%
Cash
0%
Large Cap Eq.
25%
Fixed Inc.
58%
Fixed Inc.
25%
Inter'l Eq.
0%
Portfolio C
Small Cap Eq.
25%
ReturnRisk*
7.06%
4.25%
Cash
0%
Large Cap Eq.
22%
Small Cap Eq.
6%
Inter'l Eq.
14%
Large Cap Eq.
27%
Fixed Inc.
48%
Small Cap Eq.
7%
Inter'l Eq.
18%
* Risk = one standard deviation
Personal Financial Planning Section
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What One Factor Most Influences Your Return?
Your Asset Allocation
Asset Allocation
(91%)
Specific Bond &
Stock Selection (6%)
Market Timing (2%)
Other (1%)
Source: Brinson, Singer, Beebower
Personal Financial Planning Section
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What Most Influences Your Asset Allocation?
Your desired rate of return
Your risk tolerance
Your time horizon
Stan
Stan and Vickie are
different…their asset
allocations will be
different too.
Personal Financial Planning Section
Vickie
62
Importance of Your Desired Rate of Return
The higher the rate of your desired return, the higher
the risk you will most likely will have to take
Desired Return
Personal Financial Planning Section
Likely Risk
63
Importance of Your Risk Tolerance
The higher your risk tolerance the more aggressive
you can be
Be More Aggressive
Risk Tolerance
Be More Conservative
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64
Importance of Your Time Horizon
Longer time horizons (5 or more years) can
absorb the ups and downs of investing more
heavily in stocks
Shorter time horizons warrant investing more
heavily in less volatile investments
Use more volatile stocks
Use less volatile investments
Time horizon
Personal Financial Planning Section
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Developing Your Investment
Plan
Use This Investment Planning Process
What do you want?
What will you have?
Will you have a shortfall?
What strategy will you employ?
What actions will you take?
Note: this process is applied to each of your investing goals
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What Do You Want?
• Your goal in today’s dollars
• Take into
account
• Number of years to your goal
• Expected inflation rate
• What you want
• To arrive at
Be sure to include important others in deciding what you want.
Personal Financial Planning Section
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How do You Define Your Goals?
Each goal will have its own time horizon
• For the period of accumulation
• For the period over which it will be spent
Make a list and refine as you go along
Start with broad ideas and work toward increasingly
specific and measurable goals
Personal Financial Planning Section
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What Will You Have?
• Current assets set aside for
your goal
• Take into
account
• Number of years to your goal
• Future saving
• Expected return on your
invested assets
• Expected future benefits
• What you will have
• To arrive at
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Where Should You Save First?
1. Your Employer 401(k) Plan (at least to the % that
gives you the maximum employer match – free
money for you)
2. Roth IRA using after-tax contributions or Traditional
IRA using pre-tax contributions, depending on your
circumstances*
3. Taxable accounts
* Only Traditional IRAs can accept pre-tax contributions. Although both Traditional and Roth
IRAs can accept after-tax contributions, it is generally preferable to use Roth IRAs. We will be
covering IRAs in more detail later. You can use a Financial Calculator to determine which type
of IRA is best for your particular situation.
Personal Financial Planning Section
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Why These Priorities?
Vickie
Salary
$50,000
Roth IRA
Using After-Tax
Contributions
$50,000
Pre-tax $
$2,667
$2,667
Tax at 25%
$667
$667
After-tax $
$2,000
$2,000
Employee contribution
$2,000
$2,000
$2,667
$2,667
Taxable
Account
Traditional IRA
Using Pre-Tax
Contributions
$50,000
Employer
401(k)
Plan
$50,000
$2,667
$2,667
Employer match –
assume 3%
Total contribution
n/a
n/a
n/a
$1,500
$2,000
$2,000
$2,667
$4,167
% of salary contributed
4.00%
4.00%
5.33%
8.33%
Outcome
$178,227
Personal Financial Planning Section
What Happens?
72
Why These Priorities?
Vickie
Account Balance in 30 Years
$600,000
$557,504
$500,000
$400,000
$356,819
$267,580
$300,000
$200,000
$178,227
$100,000
$0
Taxable Account
Roth IRA Using After-Tax
Contributions
Personal Financial Planning Section
Traditional IRA Using PreTax Contributions
Employer 401(k) Plan
73
Why These Priorities?
Vickie
Available After-Tax in 30 Years
$500,000
$418,128
$400,000
$300,000
$200,000
$267,580
$267,614
$178,227
$100,000
$0
Taxable Account
Roth IRA Using After-Tax Traditional IRA Using PreContributions
Tax Contributions
Personal Financial Planning Section
Employer 401(k) Plan
74
Consider Tax-Advantaged Accounts First
Features Available 
Tax-Deferred contributions
Tax-Deferred earnings
Employer contributions
Unlimited contributions
Automatic saving and investing
Wide-array of professionally
managed funds
Self-direction of fund allocation
Immediate penalty-free withdrawal
Employer
401(k) Plan



No

IRAs
 (1)
 (1)
No
No

529
Plan
No (2)

No
 (3)



Varies

No

No (1)
No
No
(1)
Depends on the type of IRA used.
(2)
Some states allow you to deduct your contributions.
(3)
Some states limit contributions.
Personal Financial Planning Section
75
Then Consider Taxable Accounts
Features Available 
Tax-Deferred contributions
Tax-Deferred earnings
Employer contributions
Unlimited contributions
Automatic saving and investing
Wide-array of professionally
managed funds
Self-direction of fund allocation
Buy Emplyr stock at a discount
Buy Emplyr stock without fees
Immediate penalty-free
withdrawal
Employer
DESPP (1)
No
No
No
No

Employer
DTP (2)
No
No
No
No
No
Mutual
Funds
No
No
No


Brokerage
Accounts
No
No
No


No
No

No




No


No
No

No
No




(1) Discounted Employee Stock Purchase Plan (2) Direct Transaction Program
Personal Financial Planning Section
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Now Develop Your Preliminary Plan
Question
Answers = Plan
Your goal?
Your risk tolerance?
Your expected rate of return?
Your time horizon?
Current assets set aside for your goal?
Future periodic savings/investing?
Expected future benefits?
Types of account(s) you’ll use?
Asset allocation within account(s)?
Personal Financial Planning Section
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Then Calculate Your Expected Return*
Major Asset
Class
Cash
Asset
Allocation
__________%
Historical
Return
X
4%
Estimated
Return
__________%
Bonds
__________%
X
6%
__________%
Stocks
__________%
X
12%
__________%
Hard assets
__________%
X
8%
__________%
Total
100%
__________%
* Calculated for each account you are using to invest your savings.
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And Then the Future Value of These Items*
Contribution Toward Goal
Current assets set aside for
your goal
Future periodic
savings/investing
Expected future benefits
Future Value Calculation
Calculate the future value of
this amount invested at your
expected rate of return over
your time horizon
Calculate the future value of
these payments at your
expected rate of return over
your time horizon
Calculate the future value of
this amount invested at your
expected rate of return from
the date of receipt to the end of
your time horizon
* Calculated for each account you are using to invest your savings.
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The Result is What You Will Have
• Current assets set aside for
your goal
• Take into
account
• Number of years to your goal
• Future saving
• Expected return on your
invested assets
• Expected future benefits
• What you will have
• To arrive at
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Key Points to Remember
Financial planning will help you clarify goals,
strategies and action steps
Determine whether you have too much debt and
develop a plan to conquer it
Make wise decisions about using debt
Commit to saving and investing
Save and invest early
Pay yourself first
Learn as much as you can about investing to
develop a plan and invest according to your
“comfort level”
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Questions?
[insert contact information here]
Special thanks to Kevin Roach, CPA/PFS of Texas A&M University for contributing content.